Money: Investments with heart

By PHILIP MACALISTER*

Investing your money in a way which reflects your beliefs or values has always sounded like a good idea, but until recently hasn't been very practical.

For instance, you may want to put your money into businesses that maintain good environmental standards, or ones that have positive employment policies. On the other hand, you may be keen to avoid investing in so-called "bad" industries such as alcohol, tobacco, gambling and armaments.

The investment concept is called ethical investing in New Zealand and the United Kingdom, or socially responsible investing in the United States. It's a concept which has been around for a long time but hasn't taken off for a variety of reasons.

One of the main reasons, particularly in New Zealand, is that there aren't many ethical investment vehicles. The second is that there is a perception that ethical funds, while morally strong, are poor performers when it comes to returns.

Times are a-changing. In the US and the UK, ethical investing is growing and there is big money flowing to this sector.

A US survey by the Social Investment Forum revealed the sector had experienced rapid growth reaching the $2.16 trillion mark of asset under management in 1999.

The forum's outgoing president, Steven Schueth, says more than one out of every eight dollars under management in the US are now part of a socially invested portfolio.

Similarly, there has been strong growth in the UK, and that is likely to be fuelled by a new pension law that requires all occupational superannuation funds to disclose to the public "the extent [if at all] to which environment, social or ethical considerations are taken into account in the selection, retention and realisation of investments."

Mr Schueth told the Centre for Business Ethics Conference in Auckland this week that there is an important distinction from other sector funds. The demand for ethical funds is coming from the consumer.

"Wall Street did not cook this thing up," he said.

Mr Schueth says ethical investing is "a way for people to integrate their personal values into the investment decision-making process."

The demand for ethical funds isn't confined to the US and the UK. A recent survey done by KPMG in Australia found that 69 per cent of people would consider investing their super in a socially responsible fund.

Not surprisingly, there are now more than a dozen ethical funds on offer in Australia.

The options available for New Zealand investors in ethical investing are limited at present, but that is starting to change.

AMP Henderson Global Investors has started promoting a UK-domiciled unit trust in New Zealand, and its London-based marketing manager, Mark Campanale, is moving to Sydney early next year to set up an ethical investment business down this way.

Another heavyweight of the scene, US-based PAX World Fund Family is looking at the Australasian market, and Tower Asset Management, which has had a fund in Australia for many years, is at present developing a fund for the local wholesale market.

One would expect ethical investing to be big with New Zealanders when you consider some of this country's recent history in this area: opposition to the Springbok tour and apartheid in the 1980s; the anti-nuclear stance; our clean, green image; and the fact that the country has been a leader in issues such as giving women the vote.

Yet these values haven't been translated into investment intentions.

Nationwide financial planning firm Money Managers has for many years tried to use ethical investing as a way of attracting clients, firstly by promoting an Australian-domiciled fund in New Zealand and, more recently, by including an ethical income fund into its successful First Master Trust service.

Last week, however, it decided to wind up its ethical fund as it had attracted less than $10 million from investors.

Marketing manager Al Scott disagrees with the proposition floated by foreign fund managers that ethical funds are being driven by consumer demand.

"I would definitely say it's not driven by consumers."

Part of the reason for this lack of interest revolves around the investment options available to fund managers, and consequently the returns generated.

Money Managers' fund was invested in Government stock and local authority bonds, so in essence it was little different to other types of fixed-interest portfolios.

Mr Scott says it was invested this way because there were so few options available on the New Zealand Stock Market.

He points out that the New Zealand market is narrow already and, by screening out companies which don't fit the ethical definitions (such as those involved in alcohol, tobacco and gambling), the investment universe becomes too restricted.

That view is supported by research conducted by actuaries Melville Jessup Weaver.

Mark Weaver says analysis of the New Zealand sharemarket is not straightforward, as many smaller companies are shells. However, on a market capitalisation basis:

* 35 per cent of the NZSE10 and 46 per cent of the NZSE40 pass the most stringent screens.

* 20 per cent of both the NZSE10 and NZSE40 fail the ethical tests.

* 45 per cent of the NZSE10 and 35 per cent of the NZSE40 might pass, depending on the degree of acceptable ethics.

"Of the 52 securities in the NZSE40, seven fail the ethical screening test and a further six are borderline," Mr Weaver says.

"Clearly, a strong stance reduces diversification and hence increases risk."

Mr Scott says while New Zealanders would appear to be predisposed towards ethical investments, "it doesn't seem to translate through to investment intentions."

That may be about to change, as a "second generation" of ethical investment vehicles are rolled out. Two of the main changes are that firms such as PAX now offer in the US a broad range of ethical funds, including share funds, bond funds and balanced funds.

Secondly, managers have become far more sophisticated in their approach to the concept of ethical investing. Instead of just using the "negative screen" approach and automatically ruling out "bad" industries, they have developed two other models.

One is based around shareholder advocacy and the other community investment.

The other major concern relates to returns. The general view is that ethical funds fail to perform, yet that is challenged by the track records of the older funds.

The Social Investment Forum in the US says that social indices have consistently outperformed the S&P 500, and ethical funds are twice as likely as all managed funds to earn top Morningstar ratings.

Analysts Melville Jessup Weaver looked at the performance of 67 ethical funds (45 of these were US equities), which had funds under management totalling $16 billion.

It found that over the one-year period of its research, ethical funds added significant value (6 per cent to 11 per cent) but added little value over 3 years (minus 1 per cent to 3 per cent a year).

Tower Asset Management business development manager Melanie Hewitson says that "as with any investment product [the returns], will depend on the manager."

She advises people to take the same approach to selecting an ethical fund as they would with a more conventional fund, "otherwise they could be in for a nasty surprise."

* Philip Macalister is the editor of online money management magazine Good Returns (www.goodreturns.co.nz), which provides news on managed funds, mortgages, superannuation, insurance and financial planning.